Here is our ‘Top Ten Small Business Tax Deductions’.
1. The Car
Sole traders and business partners may claim a proportion of their car’s running costs, including petrol, insurance, road tax, repairs and maintenance, based on their annual business mileage. Sadly, your regular home to work travel doesn’t count as ‘business use’ for this purpose.
On top of all the running costs, you can also claim capital allowances on the car at the lower of £3,000 or 25% of the car’s ‘written down value’ each year. The car’s ‘written down value’ is the amount you paid for it less the amount of capital allowances you’ve claimed on it previously.
For a new car, you get a full year’s allowance in the year of purchase, even if you buy it on the very last day of your accounting period. You will usually also get a balancing allowance when you sell your old car. So, changing your car regularly makes good sense for tax purposes!
All your capital allowances must be restricted to your ‘business use’ proportion in the same way as your running costs.
Company owners face a choice regarding their car.
If their company owns the car, they can claim all of it’s running costs plus capital allowances, as described above, but without any restriction to the ‘business use’ proportion. The price of this is that they must then pay Income Tax and Employer’s National Insurance Contributions on a ‘Benefit in Kind’ equal to somewhere between 15% and 35% of the car’s purchase price when new. The total annual tax cost for a company car bought for £30,000, for example, may be as much as £5,544.
On the other hand, if the shareholder/director owns the car personally, they may claim mileage expenses from the company at the rate of 40p per mile for the first 10,000 miles of business travel each tax year and 25p per mile thereafter.
These mileage claims are tax deductible for the company and tax free in the director’s hands.
The best choice in each individual case will depend on the director’s own personal circumstances. One thing which is pretty clear is that it is almost never worthwhile allowing the company to pay for the director’s private fuel costs as this can lead to an extra tax cost of up to £2,661 per annum.
2. Your Home
The owners of most small businesses will work from home at least occasionally, even if just to do the paperwork sometimes.
In these cases, the taxpayer may claim an appropriate proportion of his or her household bills as abusiness expense, including heating and lighting costs and council tax.
Here the proportion is generally based on the number of rooms in the house, excluding bathrooms, toilets, kitchens and hallways.
Example
David’s house has one large living room downstairs, a kitchen, a bathroom, two bedrooms and a small box room.
David keeps some of his business paperwork in the box room and tends to spend one evening most weeks sorting it out. There is also a camp bed in the box room, which is used by house guests about twice a year.
David could justifiably claim around 24% of his household bills as a business expense. This is because he uses one room out of four for business purposes about 95% of the time.
3. Your Family
Sadly, you cannot claim for the cost of supporting your family.
However, there is a way to claim deductions for the support which your family gives to your business. If any member of the family does any work for your business, you may pay them an appropriate salary and claim it as a business expense. Be imaginative – if your wife takes business calls on your house phone then she’s working for the business!
If the recipient has no other income, you will be able to pay them up to £4,895 this tax year without any Income Tax or National Insurance costs arising.
4. Making The Most Of Travel and Subsistence
Let’s suppose you need to go to Paris on business and stay there overnight.
You could take a cheap flight, slog your way into the city from Charles de Gaul by train and metro and grab a quick bite at McDonalds. Cheap, not cheerful and fully allowable.
Alternatively, you could travel first class by Eurostar, move around the city by taxi and dine at Maxine’s. Not cheap, much more cheerful and still fully allowable.
The point is, when you’re away on business, your travel and subsistence costs are fully allowable and it’s none of the Revenue’s business how much you want to spend.
As a result, having a slap up meal while you’re away on business will often end up costing you only half as much as the same meal at home. So, why not treat yourself? The Government’s sharing the bill!
5. Childcare Costs
There are now some very generous tax reliefs for childcare costs.
For example, if you run a crèche at your company’s premises which is available to all employees’ children, the cost will be tax deductible and there will be no taxable Benefit in Kind for you if your own children use it.
6. Telephones
Sole traders and partnerships can claim the cost of business calls on home phones and mobiles. Line rental can also be claimed where it is purely a business line.
Director/shareholders may claim reimbursement for the cost of business calls made form home phones.
Your company can also buy you a mobile phone without any taxable Benefit in Kind arising.
7. Loans and Overdrafts
Generally speaking, interest costs which you incur personally are not usually allowable, whereas interest on overdrawn business accounts and loans is deductible.
The best strategy from a tax standpoint therefore, is to borrow within the business rather than personally.
8. Pension Contributions
As long as you stick within the relevant contribution limits, you should be able to get tax relief for pension contributions which you either make personally, as a sole trader or partner, or which your company makes on your behalf.
This will extend to contributions for any family members working in your business.
9. Decorating the Office
The cost of decorating your business premises will be allowable.
This could extend to items such as paintings and antiques which your use to decorate areas which will be seen by customers and the general public. You will need to make a business case for the expenditure, and larger items will only attract relief under the capital allowances system, but, nevertheless, the scope exists for some significant deductions to be claimed.
10. Staff Parties
The cost of staff parties and any other form of staff entertaining is usually deductible. Typically, this will cover the Xmas party or annual dinner.
As long as the annual cost of any staff functions is kept under £150 a head, there will be no taxable Benefit in Kind for the employees either. This allowance can be used to exempt one or more functions each year, the total cost of which does not exceed £150 per head.
Of course all these tax deductions are applicable to those with a limited company. If for example you are a freelancer with an umbrella company then a different set of scenarios apply.